The outgoing head of the fourth-largest US asset manager has warned that a wave of consolidation in his sector risks blunting firms’s edge in an increasingly competitive market.
Asset managers have raced to broaden their offerings through mergers and acquisitions, but an attempt “to be all things to all people” is misguided, said Cyrus Taraporevala, who this month stepped down as chief executive of State Street Global Advisors, which has $3.3tn in assets.
“We have never been a believer in that trend,” Taraporevala told the Financial Times in an interview. “You’ve got to be distinctive in what you’re offering.”
Asset management has experienced record levels of dealmaking in the past few years, with more than 2,200 transactions completed since the start of 2021, according to Refinitiv. The rise of passive indexing has put pressure on management fees, while technology has accelerated change in the sector.
Traditional asset managers have raced to build scale as well as diversify offerings through M&A. Alternatives providers, who help give investors access to illiquid investments such as private equity or credit, have been popular acquisition targets, as have groups that offer customised investment products.
But asset managers that have strayed outside their wheelhouse and added new capabilities without “discipline” on price or utility could struggle. “I’m not saying you just have to focus on one edge, or that you can’t expand your edge,” said Taraporevala, who took over at SSGA in 2017. “But bits and bobs are not an edge.”
Mergers in the asset management industry are known for being difficult to execute. While some deals have had happy endings, he said, “there’s at least as long a list that haven’t been successful.” In November, State Street called off a deal to acquire Brown Brothers Harriman’s investor services business, citing regulatory hurdles.
Those who will be successful “are able to answer the question, is it really adding an additional edge?” he said. “Just because you’ve acquired some capability, unless it’s distinctive, it’s not like the client doesn’t have other choices where they can get exposure to that asset class, or that style or that strategy.”
State Street Global Advisors, the asset management group within State Street Corp, is focused on lower-cost index products that helped the manager achieve massive scale. Taraporevala nearly doubled the size of State Street funds during his tenure, according to Morningstar data.
But markets have taken a beating this year, as rising inflation and interest rates have hit growth stocks. Investment companies have also struggled, with State Street Corp’s share price down 17 per cent since January.
State Street’s largest investment fund tracks the S&P 500 index with more than $375bn. At the end of November, total net assets for the firm were down $30bn since the start of the year, to $1.3tn, but the group absorbed $25bn in net inflows over the same period, according to Morningstar data.
Taraporevala, who was succeeded as chief executive by former New York Life chief executive Yie-Hsin Hung, said sentiment in the market has been challenging, oscillating between “high risk” and “crisis” all year. “It’s been quite extraordinary. We only put some risk back on a few weeks ago,” he said.
“In our tactical portfolios — and tactical is the operative word here — we have been more risk-off and overweight cash as well as commodities,” Taraporevala said. The asset manager also underweight fixed income in these short-term portfolios.
He said that depending on an investor’s perspective, the US is either at the end of an extraordinary bull market, or several years into a “darn good” bull market that has seen a correction. “And unfortunately, part of the phenomenon of the late bull market is taking risks, saying things like, ‘this time it is different’,” Taraporevala said.
Part of the challenge facing the rapidly expanding asset management industry, he said, is that many money managers and executives have never experienced such choppy markets or such pervasive inflation.
“We have an entire generation of portfolio managers who have never actually experienced inflation . . . You’d have to find me somebody who was working in the early 1970s before I could start bringing in talent who’ve lived with inflation.”
Some managers who have grown up outside the US do have familiarity with the perils of inflation, said Taraporevala, who grew up in India.
“I experienced inflation by the accident of where I was born . . . These are real issues many people haven’t dealt with in their professional careers . . . that people will need to wrap their heads around.”
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